Winter 2002 Vol. 11 No. 1

Starting Your Own Business

Have you ever fantasized at one time or another about going into business and being your own boss? In the 1980's a growing number of Americans turned that fantasy into a reality. Since that time, thousands of corporate executives, MBAs, retirees and individuals interested in a career change struck off on their own and are succeeding. As owners of small businesses, they have created a dynamic force that has revolutionized the business world.

The new age of the entrepreneur is also an age of opportunity. For example, a substantial number of business owners today are women. In 1987, women owned firms accounted for 30 percent of the nation's 13.7 million small businesses and generated more than $65 billion in gross receipts annually. Today, the Center for Women's Business Research, estimates that the number of majority-owned, privately-held women-owned firms account for 6.2 million and will generate more than 1.7 trillion in gross receipts.

But success is far from automatic. Starting a small business is risky, and the odds of succeeding are daunting. According to the SBA, only 50 percent of small businesses survive their first year of operation. By the tenth year, between 80 and 90 percent have failed.

These figures aren't intended to scare you, but rather prepare you for the rocky path that lies ahead. Underestimating the difficulties inherent in running a business is one of the biggest obstacles entrepreneurs encounter when starting a new business.

If you are patient, willing to work hard, and take all the necessary steps the chances of surviving and prospering are greatly increased. Financing, excellent record keeping, good management, thorough market analysis, reliable employees, location, customer service, and technology are all important factors worth considering when thinking about starting your own business. However, the most important tip for new business owners is planning. Insufficient planning is often the reason why entrepreneurs spend so much time climbing out of the holes they've dug rather than scaling the ladder of success.

Starting a business is one of life's biggest commitments. Not everyone is cut out to be an entrepreneur. It takes a special talent. Some owners of small businesses have it and some don't. Before investing time, energy, money and a piece of your heart, it's important to do some serious self-analysis. Starting a business is risky at best; but your chances of succeeding will be improved if you understand the problems you're likely to encounter and have them worked out before you start. Ask yourself the following questions. Am I prepared to work hard and make sacrifices? Am I self-disciplined? Do I have management ability? Am I experienced enough in this field? What do I want out of life? Are my goals realistic and attainable?

Studies have shown that successful entrepreneurs share certain characteristics including an overpowering need to achieve. Entrepreneurs tend to be more creative and innovative than the average person. They are self confident and not easily defeated. They thrive on challenging tasks and have a tremendous need to be in control. They are risk takers. They welcome responsibility and are willing and able to make crucial decisions. In addition they are able to learn from their mistakes.

Successful entrepreneurs possess an optimistic and cooperative outlook, and usually get along well with people. They have well developed oral and written communication skills and overall technical knowledge of the goods or services they produce.

Moreover, they are patient and able to wait out a generally slow beginning of a business venture. They are devoted to their endeavor and are willing to work countless hours often at the expense of friends and family. Entrepreneurs coined the term "workaholic" mainly because they continue to work despite headaches or other aliments, which might keep others away from the job.

PLAN YOUR BUSINESS After making the decision to start your own business, it is crucial to formulate a realistic path for your business. Planning helps to minimize the risks involved. A Harvard University study showed that the amount of time spent planning a business is directly related to its success. Owners spending six months or less ended up with an 80 percent failure rate. Those who took a year or more to plan ended up with an 80 percent success rate.

Many new entrepreneurs don't realize the business plan is the most crucial document to develop during the planning stage because it tells a complete story about their business. A well-prepared and comprehensive business plan (updated every six months) serves several purposes.

It forces you to take an objective, critical and unemotional look at your business project the way an outsider would. It assists you in setting goals and determining how workable and desirable your venture is.

It is an important sales tool for raising capital from outside investors. These people are primarily interested in the future profitability and value of an enterprise. They need to be convinced that they will earn a substantial return on their investment within a few years.

It is a starting point for a more detailed operational plan, and becomes an important management tool for monitoring the growth and performance of the firm and charting future directions.

It is a must when applying for a loan. To the lender, the plan reveals your evaluation of your venture's feasibility and reflects your management ability.

Business plans are not all the same. They vary depending on the type and size of the venture. However, all plans should be well organized. If you need assistance in preparing your business plan, the Service Corps of Retired Executives (SCORE) is an organization of skilled professionals that can assist you. You can also get assistance from the Small Business Administration, as well as online sites for starting your own business.

It is important that you are familiar with the information contained in your business plan, as you will have to meet with prospective lenders. Your knowledge and understanding of the plan will influence their decision. The importance of a business plan is not just a written document, but rather the process and thinking involved in developing a successful business.

Once you have completed your business plan, review it with a friend or business associate or a Small Business Development Center (SBDC) counselor.

When you feel comfortable with the content and structure make an appointment to review and discuss it with your lender. The business plan is a flexible document that should change as your business grows.

Business Plan Outline The following outline of a typical business plan can serve as a guide. Breaking down the plan into several components helps make drafting it a more manageable task.

Many people mistakenly assume that in order to write a successful business plan, that they should impress the reader with complex technical jargon, and complex corporate structures. However, that is just the opposite of what a lender really wants to see. The purpose of a well-prepared business plan is to show how practical and attainable your goals are.

Whether you are trying to raise $15,000 or $150,000, you should be sure to address certain crucial areas that convince investors that your business is a good risk. The following is a good foundation, however you should tailor your plan to meet the demands of your business emphasizing on strengths and addressing potential problems and challenges.

Introduction The introduction should concisely describe the key elements of the business plan. For the firm seeking financing, the summary should convince the lender that it is worthwhile to review the plan in detail:

. Give a detailed description of the business and its goals.

. Discuss the ownership of the business and the legal structure.

. List the skills and experience you bring to the business.

. Discuss the advantages you and your business have over your competitors.

Products or Services

. Describe the product or service or planned products or services. . Importance of each product or service including sales projections. . Product or service evaluation.

. Comparison to competitors products or services and competitive advantages.

. Outline the demand for your product or service

Marketing

. Identify the customer demand for your product/service.

. Identify your market, its size and locations.

. Description of prospective customers.

. Identify your competition.

. Explain how your product/service will be advertised and marketed.

. Explain the pricing strategy.

Financial Management

. Explain your source and the amount of initial equity capital.

. Develop a monthly operating budget for the first year.

. Develop an expected return on investment and monthly cash flow for the first year.

. Provide projected income statements and balance sheets for a two-year period.

. Discuss your break-even point.

. Explain your personal balance sheet and method of compensation.

. Discuss who will maintain your accounting records and how they will be kept.

. Provide "what if" statements that address alternative approaches to any problem that may develop.

Operations

. Explain how the business will be managed on a day­to­day basis. . Discuss hiring and personnel procedures.

. Discuss insurance, lease or rent agreements, and issues pertinent to your business.

. Account for the equipment necessary to produce your products or services.

. Account for production and delivery of products and services.

Concluding Statement Summarize your business goals and objectives to express your commitment to the success of your business.

Source: U.S. Small Business Administration